UK: Delivery Services

There have been a couple of recent developments in the world of
delivery.

The first involves the attempt by competitors to Royal Mail to
challenge the exemption that Royal Mail applies to the
'downstream delivery service'. This is the part of the
delivery process that takes your parcel from the sorting office to
your front door. This is distinct from the 'upstream'
service which takes it from the post box (or depot) to the sorting
office.

Royal Mail allows direct access to organisations that have
enough mail to warrant it (usually quoted as Ł5,000 worth per
annum) so that the exemption benefits the consumer. This is
important for exempt sectors such as finance and charity. But the
competing deliverers thought this unfair as it meant that their
downstream service cannot compete fairly as they are not eligible
to exempt services. So they argued that the downstream service is
not the universal postal service (because it is not 'end to
end') and thus ought to be taxed by Royal Mail.

But the Court did not uphold this view. The downstream service
was more or less universal in terms of access and this meant that
the exemption could fairly be applied. This is going to be very
important, particularly because of the developments discussed
immediately below.

A few weeks ago many of us were surprised and perturbed to learn
about an ostensible volte face by HMRC concerning the VAT rules on
direct mailing services. It had been assumed that, where printed
material that is zero rated is delivered by the printer under a
single contract, this means the entire service is zero rated as
what is known as 'delivered goods'. This is because the
delivery is not so much a service to the distributor of the
materials as simple transit of the goods that the customer has
ordered.

But, under some pressure from the Direct Marketing Association
to confirm that this was the case, HMRC said it was not. In more
than one letter with various officials and a minister, the line
taken was that printing, and even making the post packet ready for
delivery in operational terms (which of necessity involves an
element of pre-sorting) might be part of a zero rated supply, and
that design of the products could also be included in the zero
rate, but that the act of putting the packs in the post and
recharging the delivery cost was not zero rated. Indeed, not only
was that the contention, but HMRC said that the existence of a
delivery element in the supply transformed the activity into a
'marketing service' which makes the entire supply standard
rated.

In my view this is incorrect. The precedent of
Plantiflor (a House of Lords decision) makes clear that
delivery charges for goods that are sold is part of the sale price
of the goods. This is not dependent on the goods being delivered
only to the door step of the contractual customer. They can be
delivered 'to his order', which is to say, to any location
he specifies. Indeed HMRC's Notice says as much. It says that
delivery under this treatment can be made to a customer's own
customer. And, that is stated as being an example, not a
restriction.

Where do we go from here? Well, if HMRC does not heed the strong
comments of disagreement from senior consultants and the industry
the result could well be a test case, which logic suggests ought to
stop HMRC in its tracks. But litigation takes time and meanwhile
HMRC has said that it will expect providers to account for VAT
(from 1 October, though that date may or may not apply depending on
negotiations). HMRC says it will be 'sympathetic' where
arrears of VAT are in point, but even where there is sympathy, it
will not be to the extent of allowing past delivery charges to
remain zero rated. They intend to tax delivery even where they
decide to be generous and not tax the product price element. It
remains to be seen whether they hold to that line of
'generosity'.

But, pending a successful test case against HMRC, the obvious
solution (which HMRC neither denies nor challenges) will be for
customers to ask the print house to access the postal system as
their agent, not as a principal. This means that the above
mentioned downstream service (some 90% of the cost) will be exempt
from VAT. This will allow the zero rated printed material to remain
zero rated. So, not much revenue gain, but achieved at a maximum of
industry pain.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Since we have seen a focus and clamp down on tax avoidance/evasion and suggestions in the media that tax planning of any form is immoral if not illegal, some people have become nervous about taking any tax planning steps at all.

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